When a high-tech trend threatened the future of his business, Michael Edell radically reshaped his company. Two years later, he's suffered record losses and lost legions of employees. But don't stop him now.
Bottom Line
How would you feel if one day people just stopped buying your most popular product? Software vendor Michael Edell got a taste of that feeling in October 1998.
That's when Edell began to notice a disturbing sales pattern. His company, jeTech Data Systems, based in Camarillo, Calif., created and sold labor-management software, which automates the administrative tasks -- payroll, time tracking, and project planning -- that come with managing a large workforce. At the time, Edell's company was losing deals, but not to rival vendors. Instead, sales prospects were forgoing software products altogether, preferring punch clocks and paper -- in Edell's view, inefficiency -- to the expense and hassle that came with buying and installing jeTech's software.
Never in 15 years had Edell, then 35, experienced such flat-out rejection. He knew something was up. "When you look at our markets, a solution like ours makes so much sense," he says. "It had to come down to the fact that we were somehow doing the wrong thing."
Meanwhile, in another realm of the software universe, the application service provider (ASP) model for selling and distributing software was emerging. ASP software vendors act like high-tech landlords, providing their customers with software over the Internet for a fixed monthly fee. Customers usually access the software, which runs on the vendor's servers or on those of a third-party provider, through their Web browsers. Besides giving customers more predictable costs, the ASP model spares them the headaches of buying servers, hiring IT staff, and enduring lengthy systems-integration ordeals.
Edell pondered his lost deals and concluded that unless jeTech began offering Web-based software, the company might well be doomed. This past January, jeTech became eLabor.com, the first software vendor to offer an ASP model in the labor-management niche, according to industry sources. By then, of course, few software vendors didn't have some sort of ASP plan. But back in 1998, ASPs were practically unheard of. These days, companies with an ASP approach are backed by venture capital and are officially hot. Research firms are also crowing about the ASP model. IDC, for one, believes the market for ASP software will balloon to $7.8 billion by 2004, compared with the $300 million it took in last year.
But for all the noise surrounding the ASP trend, what's rarely discussed is the dilemma small vendors like Edell face because of it. What happens when the product you've sold for years for millions of dollars suddenly has no prospective buyers, only renters? Obviously, your cash flow plummets -- at least at first. Using an ASP system, some vendors reap the same revenues they would have received as traditional software vendors, but the money is paid out over time. Most actually make more in the long run by structuring their leases not for a given period but for as long as the customer uses the product. Either way, there's a big cash crunch up front as the vendor adjusts from a diet of six-digit pie to monthly morsels.
Software vendors also have to determine whether they should switch whole hog to an ASP model or continue to offer customers the choice of buying their product outright. Offering both options gets tricky. How, for instance, do you structure incentives for your salespeople so that they will push the "cheaper" ASP model? And how do you explain to customers who've recently installed your software that the very package they've just paid six digits for and that required months to get configured is now available at rental rates on the Web, with minimal customization required?
Those were a few of the challenges Edell confronted as he transformed jeTech into eLabor.com. The issue was not whether jeTech would change, according to Edell. "It was how do you finance, deploy, and market that change?" he says.
Michael Edell decided that unless jeTech began offering Web-based software, the company might be doomed.
Edell lists financing first for a reason: adapting software to make it deployable on the Web is pricey because of the personnel (costly programmers and Web designers) and gear (the latest servers and network equipment) needed to do the job. Most industry observers agree that it's nearly impossible for a small software vendor to switch to an ASP model without acquiring millions in outside funding, both to pay for the overhead and to provide operating capital until rental revenues ramp up enough to cover monthly costs.
At best, switching to the rent-based model would mean two years of flattened sales. At worst, if leasing never caught on with the large businesses that typically use labor-management software, the move would drown jeTech in red ink. Both scenarios were tough for Edell to stomach.
But Edell could at least feel confident that he had a key advantage when it came to seeking external financing: a track record as an experienced pre-Internet entrepreneur. Edell had built jeTech from barefoot beginnings in 1983 into a $14-million, 85-employee player. With customers like Corning and Hertz, tiny jeTech competed with national powers like $254-million Kronos and Simplex, which has revenues of more than $800 million. Edell consistently kept jeTech's margins near 20%. During the company's migration from DOS to Unix, in 1983, and throughout the early-1990s recession, jeTech stayed debt free, growing without outside funding.
Edell doesn't hesitate to invoke his status as an industry veteran, a profits-first type who needs a swig of Maalox when he hears about Web-based companies with free products and deep deficits. "I'm from the old school," he says. Complementing Edell's sturdy résumé is his decidedly sturdy appearance. With his full head of jet black hair, the energetic, six-foot-two Edell resembles not so much a grown-up techie as he does a seasoned corporate battler. "Customers don't like to buy from rookies," says Brad Jones, partner at Brentwood Venture Capital, which in November 1998 poured $7.5 million into jeTech.
